Question

Isadore Bell Company granted 8 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $3 per share on January 1, 2018, the grant date. When calculating diluted EPS at December 31, 2019, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averaged $4 per share during 2019?

a.		8 million
b.		6 million
c.		2 million
d,		2.67 million

Answer 1

Solution:

Amount to be paid for stock option = 8*3 = $24 million

Value of option in current shares = Amount paid to exercise option / Current market price = $24 / $4 = 6 million shares

Diluted shares = Option issued - Value of option in current shares= 8 million - 6 million = 2 million

Therefore

net increase in the denominator of the EPS fraction if the market price of the common shares averaged $4 per share during 2019 = 2 milion

Hence option c is correct.